Dealers are leaving no stone unturned within niche sectors as they try to revive the flagging structured market in Europe. Demand for commodity-linked notes, though still very small, is showing promising growth. There has been $69.59 million-worth traded in 2000, according to MTNWare, and dealers report much more. If oil prices remain high many investors could be enticed to take a view on the market. When structured demand is lacking it is important to keep track of where opportunities might lie. Alexis Renard, Euro-MTNs and private placements, at Goldman Sachs, says the desk has managed to do 20 commodity-linked notes this year. But most are unlisted and only one can be seen in MTNWare. He says: "We've seen a big increase in commodity-linked transactions in recent years, particularly this year. Both overall volumes as well as the size of individual trades have risen substantially." Another trader says: "Looking at the volatility of oil prices this year, certain options could be profitable. If an investor is keen to take a certain view, it sometimes helps that the underlying asset is highly volatile because the payoff will be even bigger." One issuer taking advantage of this pocket of demand is Eksportfinans. It did a $21.5 million three-year deal in May this year. Preben Stray, vice-president in the treasury at Eksportfinans, says: "It is a fairly specialized structure but all index-linked notes offer investors a good alternative and the commodity-linked deals are often chosen by investors looking for some kind of hedge." The note was linked to the performance of the Goldman Sachs commodity index (GSCI). This index, which was established in 1992, tracks the returns of 26 commodities including energy products, metals and agricultural products. Renard, at Goldman Sachs, explains why these notes are attractive to some buyers. He says: "One motivation is perhaps fears over increasing inflation. By linking notes to an index such as GSCI portfolio managers have a natural hedge against inflation. Also it's a nice diversification away from the traditional fixed income products." Stray, at Eksportfinans, was comfortable with the deal. He says: "We had done this structure before with Goldman Sachs so the documentation was in place. It's important to be familiar with the structure and to understand the full credit exposure so that the pricing is accurate." But not all issuers are happy doing complex structures since the assets can be difficult to track and price. And investors feel more secure with strong credits, such as triple-A rated Eksportfinans, when buying complicated structures. One dealer says: "Usually investors want a good credit rating like a mid double-A or triple-A. If they're going to take a view on a particular market they don't also want to take a view on a credit. Also these are quite sophisticated structures so it's generally banks that are interested in them." Yet single-A rated SNS Bank managed to seize an opportunity for a euro48.09 million ($45.55 million) commodity-linked note in March 2000. This proves that if an issuer is sophisticated enough to be able to price and track the structure its rating should not be a barrier to trading. Toine Teulings is a dealer in debt capital markets at SNS Bank. He says: "This trade came out of the blue for us but it is nice to know, as a single-A rated issuer, that investors want these types of structures from us. As with any new structure there was a learning curve but it was nicely priced for us and it was well worth doing the trade." And Renard, at Goldman Sachs, believes that as the structure becomes more popular a wider variety of issuers will be able to cash in. He says: "We're doing our best to fully expand our issuer base for these notes. In previous years we only used the obvious three or four highly-rated issuers but this year we've tried to open it up and get more issuers and those of lower credits issuing this structure." Historically, commodity-linked notes have sold to individual investors mainly in Europe and Asia, and were for small amounts. But dealers report that this is gradually changing. One trader at a US house says: "There's been more interest from a wider range of investor types. We've sold these notes to institutional investors and private banks as well as to high net worth individuals this year." But Daniel Cogoi, global head of Euro-MTNs at BNP Paribas, says: "Typically these notes sell to one institutional investor or a single retail buyer, but the volumes are still so small - for example we've only done a handful of these trades this year - that it is difficult to see any investor trends." There is a tone of optimism from many in the market that the appeal of commodity-linked notes will widen. Renard, at Goldman Sachs, says: "From our experience 2000 has already seen substantial growth in volumes of the structure. It's not going to be billions and billions but I expect that it will go on increasing. We now have a better understanding of which issuers can do these notes and we have also significantly increased our investor distribution for the product."
October 13, 2000
